Working Paper
727

Equilibrium Labor Market Search and Health Insurance Reform

Abstract
We present and empirically implement an equilibrium labor market search model where risk averse workers
facing medical expenditure shocks are matched with firms making health insurance coverage decisions.
Our model delivers a rich set of predictions that can account for a wide variety of phenomenon observed
in the data including the correlations among firm sizes, wages, health insurance offering rates,
turnover rates and workers’ health compositions. We estimate our model by Generalized Method of Moments
using a combination of micro datasets including Survey of Income and Program Participation,
Medical Expenditure Panel Survey and Robert Wood Johnson Foundation Employer Health Insurance
Survey. We use our estimated model to evaluate the equilibrium impact of the 2010 Affordable Care Act
(ACA) and find that it would reduce the uninsured rate among the workers in our estimation sample from
about 22% in the pre-ACA benchmark economy to less than 4%. We also find that income-based premium
subsidies for health insurance purchases from the exchange play an important role for the sustainability
of the ACA; without the premium subsidies, the uninsured rate would be around 18%. In contrast, as
long as premium subsidies and health insurance exchanges with community ratings stay intact, ACA
without the individual mandate, or without the employer mandate, or without both mandates, could still
succeed in reducing the uninsured rates to 7.34%, 4.63% and 9.22% respectively.